Taxpayer buys a used car from a dealership, in exchange for $6,000 in cash plus $24,000 in seller financing. The debt is subsequently reduced to $15,000.

a) Suppose that the debt reduction occurred because the car had defects that justified a reduction in the initial purchase price. How much of the reduction is taxable income? (See 108(e)(5).)

b) Would your answer change if the debt reduction occurred as a result of renegotiation based on change in interest rates, rather than issues with the car?

c) What will be the taxable income when the car is sold for $30,000 after 2 years?

d) What if instead of using seller financing, Taxpayer put the $24,000 on a credit card. Would this change the analysis? (Look carefully at 108(e)(5)(A).) How will the debt reduction affect the calculation of income at the time of the sale?

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Lets address each part of the question a If the debt reduction occurred due to defects in the car th... View the full answer